More pain for Lendlease as brokers issue downgrades

Shares in Lendlease tumbled for a second day as broking houses issued downgrades in response to a surprise $350 million write-down announced by the global builder and developer last week.

The stock lost 6.3 per cent by Monday's close, giving up 90¢ to finish at $13.35 as investors absorbed a flurry of target price revisions and downgraded recommendations issued by analysts over the weekend.

Lendlease's Steve McCann has not ruled out divesting the engineering business. supplied

"We are assessing it in terms of whether disclosure was adequate and any relation that might have to the significant loss of value experienced by shareholders," a spokesman said

Ratings agency Moody's also fired a salvo, affirming Lendlease's rating but changing its outlook to negative.

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"The possibility exists that there could be additional provisions required in the future, which would add to the earnings and debt challenges arising from the two provisions announced to date," said senior credit officer Maurice O'Connell.

On Friday, Lendlease said it would take a $350 million post-tax provision in the engineering section of its construction business after wet weather, a slowdown in work on Sydney's NorthConnex, and some other project problems.

The write-down forced it to jettison a $500 million bond issue as it absorbed a punishing reaction from investors. On Friday shares slumped 18.3 per to $14.25, wiping almost $2 billion off Lendlease's value.

Citi analysts downgraded Lendlease to "neutral" from "buy", cutting the price target to $15.06 from $22.36 , noting that they have "no confidence the worst is behind" the company.

"We question how this division can get 'back on track' when it appears it hasn't been on track in the first place," analysts David Lloyd, Adrian Dark and Suraj Nebhani, wrote in their note.

"We reiterate our view that Engineering should be spun off (if possible), and believe any path to a share price recovery is now largely dependent upon Lendlease divesting Engineering in one form or another."

Comprehensive review

Managing director Steve McCann has not ruled out selling the engineering division after a comprehensive review of the business.

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Analysts are now worried that Lendlease may run into problems on upcoming projects, such as the Melbourne Metro and the third stage of Sydney's WestConnex motorway, which is now being managed by tollroad group Transurban.

"Given Lendlease's engineering, estimating and bidding teams have made very costly errors in projects under way, it is quite possible similar issues could rear their heads in the upcoming projects," said Morningstar analyst Tony Sherlock.

JPMorgan analysts inferred that the post tunnelling work at NorthConnex may have been defective, requiring Lendlease to make good. While there is a range of potential buyers for the engineering business, if none are found Lendlease might need to execute an orderly, but distracting, wind-down, they wrote.

UBS analysts have cut their target price to $15.20 from $19.50, while maintaining a "neutral" rating. They noted that the decline in Lendlease's market cap after Friday's announcement of $1.9 billion was greater than UBS's own valuation of the entire Australian construction business.